Explore BrainMass

Explore BrainMass

    Estimated cost of equity

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    A software company is trying to estimate its optimal capital structure. Right now, it has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25). The risk-free rate is 6 percent and the market risk premium is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be the company's estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity?

    © BrainMass Inc. brainmass.com March 4, 2021, 7:52 pm ad1c9bdddf

    Solution Preview

    Facts given: rs=12%; D/S =0.25; rRF=6%; RPM=5%; T =40%.
    Step 1:Find the firm's current levered beta using the CAPM:
    rs =rRF+RPM x beta
    12%=6% +5% x ...

    Solution Summary

    The solution explains how to calculate the cost of equity given a change in capital structure.